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Public Private Partnerships (PPPs): Analysing
the factors behind their growth

The economic perspective in favour of PPP
is that they present an attractive alternative to the market and contractualised
relationships and are viewed to be broader in scope than privatisation and a
qualitative leap from traditional contracting

The term ‘Public Private Partnership’
or ‘PPP’ has become a buzzword of late in the policy circles, and is being
increasingly resorted to as a preferred medium for provisioning of public
services both within the industrialised and low-income countries. While the PPPs
are more commonly found in the transport infrastructure sector, such as roads,
airports, and ports (primarily due to the commercial pricing models), they are
also invoked in water supply and sanitation, tourism, education, health, and
other social sector programmes, albeit to a lesser degree. A significant difference is however observed in the nature of PPPs
across these sectors. In many cases
they appear to be glorified forms
of service level agreements rather than ‘partnerships’ as are defined in the normative literature on PPPs.

Engagement
with the private sector for provisioning of infrastructure facilities has
become increasingly popular in the past few decades. India too has joined the bandwagon
of countries adopting PPPs for delivery of services under various
infrastructure sectors. It is claimed that India has the maximum number of
projects within PPP in the transport sector. Its experience in highways and
expressways has been substantial. All national highways in the present phase of
NHDP (National Highways Development Programme) are being implemented
within PPP mode. Recently, the empowered Group of Ministers on infrastructure has decided that 95% of road projects in the current year will be
through PPP. Several airports are being built with private sector participation,
while some metrorail projects, such as the Hyderabad metro, are also opting for
this approach rather than the traditional way of public sector delivery. According
to the Economic Survey 2010-2011,
against a target of 30% of
private sector participation in infrastructure sector, the achieved figure was 34%. An investment of USD 1 trillion has been envisaged for
infrastructure during the 12th Plan; of this USD 500 billion is expected
to be contributed by the private sector.
These figures demonstrate
the primacy given to private sector participation at the policy level.

Against
this background, this article attempts to provide theoretical insights into the
concept of PPP, and analyses the reasons for its growth and acceptance as a mode
of service delivery in many countries.

Growth of PPPs

There
have been instances of the State engaging with the private sector towards provisioning
of public services throughout the known history- the case of Mathew, private
tax-collector from the Bible; public street lamps in 18th century
England were cleaned by private contractors; the rail companies of 19th century
England and the US were privately owned; 82%
of Sir Frances Drakes fleet of 197
vessels, which conquered the Spanish armada, were owned by contractors. Toll
roads and toll bridges, privately owned and operated, has been around since antiquity.
Toll roads carry mention in writings of the Greek historian and philosopher
Strabo (63 BCAD 21) in Geographia during the time of Caesar Augustus,
where he records existence of tolls on the Little Saint Barnard Pass. Historical
development of PPPs in infrastructure had its beginning in Europe in the demand
for mass travel and long distance commerce in second half of 17th century. France
pioneered the concession type model in 17th century which was extensively used
in the 19th century to finance and develop public infrastructure.

However,
Public Private Partnerships as are known in their current form started in the Organisation
for Economic Co-operation and Development (OECD) countries and the USA.
These gradually spread to the low-income countries. Reliance on PPPs as a
preferred mode of service delivery rose to significant proportions during the
1990s, peaking around 1997. Governments under Presidents Carter and Reagan in
the USA and Margaret Thatcher in UK promoted wide range of partnerships at all levels
of the State. Among all the countries adopting PPPs, UK has had the maximum
number of projects implemented under the Public Finance Initiative (PFI) initiated
in 1992. PPPs have been now included in legislation in many countries such as
the urban policy legislation of UK and USA, industrial policies of France, and
economic development policies of Italy, Netherlands and UK. While Netherlands, Australia,
Hungary, Italy, Japan, Korea, Spain and France have had substantial experience
in implementing infrastructure projects under PPP, countries like Chile,
Brazil, Singapore, India, and Canada are actively exploring this mode of
delivery of public services. PPPs form the core of European Union (EU)
initiatives for economic competitiveness and are the preferred framework for
development of trans-European transportation. Recently the European
Commission has advocated greater use of PPPs for provisioning of
infrastructural services and bringing in innovation in service delivery.

Understanding the context of PPPs

Different
definitions and interpretations have been associated with the term Public-Private
Partnerships. These depend upon the context within which they are initiated and
operated. Simply put, the term PPP traditionally implies engaging with the
private sector for provisioning of public services and infrastructure such as
roads, airports, ports, health services, garbage and waste management. Such
services have been historically provided by the government through public works
agencies. According to some, PPP is a framework for describing all
cooperative ventures between the State and the non-State agencies, both for profit and not-for-profit. Within the limited context of transport infrastructure sector,
PPP is defined as a long term
collaborative effort
between the government and private agencies, wherein both pool in their
differentiated and specialised resources for planning, design, construction, operation
and maintenance of infrastructure services. They also share investments, risks, benefits and responsibilities. This feature of the
PPP has been argued to form the crux of the partnership. The facility thus
developed eventually reverts back to the government after expiry of the
concession period. In India this period ranges from 20 to 30 years. A common
misconception about PPPs is that they involve the private sector merely for financial
partnering. However, PPPs are more about a service procurement policy
rather than a capital asset management policy; they do not do away with
public investment but merely supplement it. Within a PPP the private partner is
involved in a broader ambit of ‘infrastructure investment’ where neither the
private sector nor the government is the only owner.

PPPs
are perceived to provide public
services more efficiently than
what the government could accomplish on its own. In the classical literature on
public administration, there is a distinct divide between the roles and responsibilities
between the State and the private sector, often termed as ‘the market’. While some
works were to be taken up by the government agencies due to their social and
economic mandate, some services were delivered by the agencies. However, the traditional
conceptualisation of the state being the sole provider of services and goods
for public welfare came under severe strain in the decades since 1970s. In the 1970s
and 1980s, as the demand for public infrastructure grew and governments became
increasingly fund starved, due to deficit financing
and populist pressures to
hold prices below costs, their capacity
to provide sufficient and quality
infrastructure was found to be inadequate. The public utilities were therefore
largely neglected. In most of the developing low income countries it was
found that public
finance for infrastructure was
generally inadequate and
full cost recovery of infrastructure charges was becoming more of an exception
than a rule. In addition to poor allocation of funds for development of
infrastructure, maintenance got even little, which was assumed to be funded by
future budgets which were typically insufficient.
Traditional methods also
left a number of risks with the public sector, regarding the asset ownership.
This is attributed to its monopoly position with no incentive for competition, poor fiscal discipline and limited fiscal
autonomy to public bodies and
managerial inefficiency which increases production cost. Many governments
attempted to improve performance through corporatisation and performance contracts
which were largely unsuccessful.

Furthermore,
the government in its controlling and regulating mode was found to be outdated,
path dependent and inflicted with the pathology of politicized bureaucracy.
This was attributed to bounded rationality of decision makers, predisposition
toward rigidity, extreme focus on rule rather than the outcome, and
growing rent seeking behaviour of policy makers. The government
agencies came to be widely perceived to be inefficient and inadequate because of their hierarchical and vertical structures
of management and incapable of delivery of quality public services which could
be sustained over a long period of time.

The
private sector, on the other hand, was seen as a better allocator of services, more efficient in delivery and management of services, and
innovative, flexible and agile to
respond to market changes. In the
USA, the early enthusiasm towards PPPs grew in the background of ‘privatism’,
which dominated American thinking since early 19th century. This presumed the private
sector to be intrinsically superior for delivery of public services. This new
philosophy was moored in neo-classical and new institutional economics. A market
focus coupled with ‘supply and demand’ and ‘user pays’ ethos tried to infuse
entrepreneurial management techniques from the private sector to increase
public sector
efficiency through contracts and
competition within the public agencies and with private sector. It stressed on disaggregation of public
services, measured performance, output control and growth of markets, and
hence, price signals. What initially started as infusing features of the
private sector in management of public organisations, in late 1970s, slowly
transformed (in 1990s) into a much larger role of private sector in providing
finances, manpower and technological resources during the construction of the
assets, and management of the services subsequently.

In
the more recent discourses on PPPs, these have been viewed as new forms of governance.
They are being analysed as ‘governance networks’ between the State
and non-State actors aimed towards collaboration, co-production, co-management
and communicative governance. They are being viewed as an alternative way of
provisioning of public services that combines the features of both the State
and the market, and as a response to limitations to markets and hierarchies
with regard to allocation of resources and provisioning of services. As a
hybrid mix of the two forms, they typically mix virtues of state, like
accountability, probity, legitimacy and transparency, and efficiency and quality attributes of the market.

Moreover,
they are argued to represent a relational dimension of the State where the
State extends itself beyond its theoretically determined boundaries, and partners
with various agencies in order to achieve its social and economic goals. PPPs also reflect the welfare state being replaced by the
‘competition state’ which behaves more like a market player and takes the lead in spearheading the
structural transformation of markets and brings about policy changes involving
the private sector. This shift is being attributed the changing meaning of what
constitutes the ‘public’ and the ‘private’ sectors. The traditional divides
between the two domains are being blurred, and new forms of governance models
are providing frameworks for delivery of public services.

Categorising PPPs

PPPs
are often classified into ‘economic’
and ‘social’
blocks and are further distinguished as ‘hard’ and ‘soft’. While roads, railways,
telecommunication and airports fall under the ‘hard economic’ category,
areas like vocational training, technology transfer and Research and Development
(R&D) facilitation are termed as ‘soft economic’. Water treatment,
housing and prisons and childcare are labelled as ‘hard social’ whereas social security,
environment services and community services are included in ‘soft social’
category.

PPPs
are also distinguished on the basis of stages in which partnership is entered into.
It can be either in the ‘planning and design’ stage or at the ‘realisation’stage. As financial
arrangements, PPPs
have been observed to take different forms. There are various terms for them,
such as BOT (Build Operate Transfer),BOO (Build Own Operate), Build
Own Operate Transfer (BOOT), and Design Build Finance Operate (DBFO).
The DBFO model appears to be most preferred PPP model across the
world.

Analysis of factors contributing to growth
of PPPs

Many
factors have been identified
for the growth of PPPs. These
have been varied across sectors and countries, depending on the context of the
prevalent structures within which PPPs operate. As mentioned earlier, on a
larger canvas, growth of PPPs is widely credited to the implicit assumption
that the market stands for
better efficiencies in production and
delivery of services, and
partnering with the market infuses reform, competition, discipline and
entrepreneurial spirit in the government.
PPPs reflect larger ideological
changes in debates of governance and the transformation of the State-market relationship
where partnerships may not only be the result, but also the cause of these
changing equations.

PPPs
have become the preferred alterative of many ‘third way’ governments which
provides them an option to tread the middle path between outright privatisation
and nationalisation. Many governments
attempt to fill the ‘capability
gap’ in areas where they lack technical expertise through these alliances.

But
the most significant reason for
opting for a partnership is the resource dependency between the two partners.
The new theory of resource- interdependence is based on the argument that to be
effective, governments must blend their capacities with those of the various
non-governmental actors. PPPs enable pooling of specialised complementary resources
of the two partners. They provide easy access to private finance, managerial knowledge and entrepreneurial skills of the manpower
in design, construction and management of assets and facilities created.
Specialisation of the private partner helps to reduce the final total cost. This
enhances the efficiency gains due to improved resource allocation, effective
organisation and innovative solutions for meeting demands of specific segments
of users. Furthermore, engaging with the private sector at the stage of problem
definition ushers in
specialised knowledge in the decision
making and policy process. Working on design and execution of a joint project
ostensibly results in rapid dissemination of skills and information, reduced
development time and fewer errors.

PPPs
also enable risk-sharing with the private sector. Infrastructure projects often involve
risks which though unvalued, are purported to carry a cost. These are all the
more in a PPP- the multitude of actors, highly technical tendering, contract evaluation
and closure processes make PPPs a complex procurement and investment process.
Some of these risks can be transferred to the private sector, which is perceived
to be in a better position to identify, evaluate and mitigate it at the lowest
cost, thus lowering total project cost and resulting in cost-effective
services. Also, due to
their more flexible and adaptable forms
of management, the private sector can respond more nimbly to threats and opportunities
as compared to the public sector.

Analysing
this from the perspective of collaborative governance, it is claimed that that
no single actor has the resources,
knowledge or sufficient action
potential to handle issues or dominate unilaterally. All governments today face
a vast array of interests, and aggregation is seen as a functional requirement and
reality. The new meaning of governance does not point to state actors as
the only entities in policy making and allocation of resources. In this milieu,
amorphous non-state agencies possessing differentiated expertise inform the collective
policy process. In this mode, the government collaborates with other actors for
both formulating and implementing policies. As new forms of governance,
collaboration and not competition is the central theme of partnerships; as
joint ventures they stabilise the volatilities in the market, and mitigate
competitive pressures instead of exploiting them.

PPPs
enable governments of the low-income countries to tide over huge public debt
and introduce innovation in design and delivery of public service thereby ensuring
its long term sustainability. The economic perspective in favour of PPP is that
they present an attractive alternative to the market and contractualised relationships
and are viewed to be broader in scope than privatisation and a qualitative leap
from traditional contracting. Fiscal pressures have often led governments to
look for innovative solutions to maximise effectiveness in reallocating resources.
Due to the ‘buy-now, pay-later’ attribute, PPPs are ‘off the balance sheet’.
This means that PPP
finances do not appear as large capital
expenditures in the year that they occur, but as series of smaller revenue expenses
over the life of the project. Evidence suggests that this helps increase Value
for Money (VFM) of the investment; keeps public sector budgets, and especially budget deficiencies, in control; allows the public sector to avoid
up-front capital costs thereby, reducing expenditure on large capital intensive
projects. Moreover, the fiscal
space created helps
boost medium-term growth and generate fiscal revenue in the future. Governments
can allocate resources to other policy priorities as PPPs are financed off the
balance sheet. According to few scholars, the partnership model has been
precipitated by economic globalisation which has structurally altered the
nature of the welfare State. Governments are forced to reduce capital spending while
still having social goals.

According
to some authors, as a public policy representing the government’s wider
approach towards infrastructure delivery, PPPs
carry a significant political undercurrent.
Promise of faster delivery of infrastructure projects and an immediate cut in
capital expenditure has potential to generate significant political incentives,
especially in the short run. PPPs enable politicians to deliver more projects
in a short time, demonstrating policy achievement and acting as a tool for
harnessing short term political gains. Furthermore, politicians have a tendency
to argue their cases based on the successful cases rather than the failures.
Politicians are also seen to be gaining from the improved relations with the construction
business houses.

Conclusion

The
article provided a brief description of the growth of PPPs, and explained its basic
features. The reasons behind the acceptance and growth of PPPs as a new mode
for delivery of public services were explored and analysed. The perspectives of
resource-dependency, economic efficiency, political imperatives and new mode of
governance were also examined.

By : Manisha VermaThe author is Civil Servant, working in the Government of India. She has a
PhD from the Institute for Development Policy and Management (IDPM) at the
University of Manchester, UK.